Corporate reputation and stakeholder perception

When studying market value movements over time, and trying to comprehend why certain companies have a low current market value as compared to their current earnings, reputations plays an important role.

Published 2016-04-01

Reputation and perception

Reputation is like branding, it is the intuitive perception of stakeholders, and a key to explain why companies get a certain value.

The difference between perception and reputation is that perception is the view of stakeholders, while reputation is the sum of the communication from the firm or about the firm.

In this case, the company may have a substantial market value measured as price to earnings ratio, pe-ratio. The difference between the financial core and the total value is the perception of stakeholders. On the right hand side, is a smaller market value but a larger financial core. This company has less of a smaller reputation premium, or smaller equity branding.

The key issues making up the reputation are things that can be controlled by management. This is the reason why management of the market value is the obligation of corporate management.

In the graph above, the reputation was measured and explained through the perception index, IQX10. This index, as outlined below, measures the key ingredients in intuitive stakeholder perception.

In the graph below, the index is used in a different way. The company is trying to build value over time, to reach optimal value, and the importance of reputation is visualized as the company will not reach the ideal value as the score in the IQX10 index is insufficient. In other words, people do not like the company enough to buy the shares.

The 10 categories of IQX10 are added up to an index with a maximum score of 100 and the categories weighted according to importance. The correlation between IQX10 and price to earnings ratio of 40 large companies is shown below:

In conclucion, investors are not rational and decisions are driven by corporate reputation. In serving the shareholders, corporate management need to deal with reputational matters.

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EQapital writes for people who are interested in a public companies. It can of course be shareholders but also employees, customers, suppliers and other stakeholders. We think they have a common interest in that the company strengthens its competitiveness through good strategic choices.

We therefore focus less on immediate profitability and short-term quarterly economy but feels that more innovation, a responsible society, and communication is more important for the long-term value creation in companies.

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